ge 238) Chapter7 + Supply chain management ca N UNL in management understo Is the importance of supply chain management understood? "The end consequence of what customers experience when they purchase a product or hnically, supply network management looks at all the operations or processes in a network, while sup- ply chain management refers toa string of operations or processes. However, the two terms are often used interchangeably. Many of the principles of managing external supply chains (flow between operations) are also applicable to internal supply chains (flow between processes). Are supply chain objectives clear? The central objective of supply chain management isto satisfy the needs of the end customer. So, each operation in the chain should contribute to whatever mix of qual- C ity, speed, dependability, flexibility and cost that the end customer requires. Individual ‘operations failure in any of these objectives can be multiplied throughout the chain. So, although each operation's performance may be adequate, the performance of the whole chain could be poor. An important distinction is between lean and agile supply chain performance. Broadly, lean (or efficient) supply chains are appropriate for stable ‘functional’ products and services, while agile (or responsive) supply chains are more. appropriate for less predictable innovative products and services.242 Chapter? + Supply chain management Why is supply chain management important? The end consequence of what customers experience when they purchase a product or service Is the result, not of an individual operation, but of a whole supply chain of operations. It's this ‘whole supply chan that wil influence final quality, speed of response, dependability, flexibility and cost of final supply. So the reputation and commercial success of an individual cornpany depends fundamentally on its position in, and relationship with, the other operations in its sup- ply chain. nd with firms increasingly outsourcing some of its activities, especially if they have ‘taken advantage of globalised supply chains, the coordination of supply has become particulasly important. Just look what happens when incompetence or natural disasters disrupt supply chains. No operations manager can afford to ignore it. ‘When an earthquake off Japan's eastern coast caused a tsunami that killed thousands of people and created a meltdown at a nearby nuclear power plant, It necessitated huge evacua- tions and nationwide power shortages, The effect on global supply networks was immediate and drastic. Sony Corporation shut down some of its operations in Japan because of the ongo- ing power shortages. Toyota suspended production at mast ofits Japanese plants, reduced and then suspended output from its North American and European operations. Nissan sald it would be suspending ite WK production for three days atthe end of the month dus {0 a shortfall of parts-from-Japanehonda-announcedthat itwas halving production at its factory in Swincion in the South of the UK, The lesson here ‘OPERATIONS PRINCIPLE ‘supply chain managements important to all operations managers because it impacts all ‘sithabsmemost- modern Supply chains, individual operations are often so ‘aspects of commercial performance. winterdependentsthat operationsmanagers must broaden theirfocus.to Include the whole chatn, of which they are a part. ‘The following two examples of supply chain management illustrate some of the fsues that ate discussed in this chapter. SZ Ocado! ‘The UK grocery market is tough. Giant retailers battle for increasingly cost-conscious customers, ‘who also demand qualty and service. So, when ‘Mark Richardson, the head of Ocado's Technol- ay operation was promoted to the newly cre- ated role of Operations Directo, it was greeted {san announcement that reinforced the impor- tance of Ocado's high-tech operations processes. It was alo seen as reflecting the urgent need for Ocado to get its state-of-the-art distribution centre operating at ul efficiency. The company’s on-time delvery performance, although still bet- ter than its rivals, had been slipping in the months prior to the announcement. This had been an unusual experience for Ocado, which was the only dedicated online supermarket in the UK and the largest dedicated online supermarket in the world, It had succeeded in reshaping the final ‘business-to-consumer' configuration of the traditional food supply chain in its UK home ‘market, and inthe process had become one of the most successful online grocers in the world Butt wasrot the fist. A few years before Ocado started, anintemet grocer called Webvan began trading in California. t gained considerable publcity and more than abillon US dallas from backers ‘wanting to join in what promised tobe the exciting new world of online etaing, However, it proved far more dfficuit than Webvan's management and investors thought to make a totaly new form of supply chain work. Within a couple of yeasit filed for bankruptcy protection. Yet Ocado has thrived.‘Are supply chain objectives clear? 247, uncertainty within the chain. If the individual operations in a chain do not deliver as promised ontime, there will be a tendency for customers to over-order, or order early, in order to provide some kind of insurance against late delivery. The same argument applies if there is uncertainty regarding the quantity of products or services delivered. This is why delivery dependabilly is often measured as ‘on time, in full in supply chains Flexibility In a supply chain context, flexibility is usually taken to mean the chain's ability to cope with changes and disturbances. Very often this is referted to as supply chain agility. The concept of agilty includes previously discussed issues, such as focusing on the end customer and ensuring fast throughput and responsiveness to customer needs. But, in addition, agile supply chains are sulficiently flexible to cope with changes, either in the nature of customer demand, or in the supply capabilities of operations within the chain. Cost In addition to the costs incurred within each operation to transform its inputs into outputs, the supply chain as a whole incurs additional costs that derive from each operation in a chain doing business with each other. These transaction costs may include such things as the costs of finding appropriate suppliers, setting up contractual agreements, monitoring supply performance, transporting products between operations, holding inventories, and so on. Many of the recent developments in supply chain management, such as partnership agreements or reducing the number of suppliers, are an attempt to minimise transaction cost. Sustainability Lisahiitamm North Faces sustainable purchasing = Fs itwas founded eas goin Sn Fans. spr of th VF Coron, giant that ey ‘responsibly aia the ere most ient and complex phies, product categories and distribution chan- ticular, Th 0 sustainability, they say, comes from a desire to protect the natural places associated with how and whee thelr products are used and from their concein, effects of climate change. As a sign of their det ein to pu ' partnered with the independent -248° Chapter7 + Supply chain management Should supply chains be lean or agile? ‘A distinction is often drawn between supply chains that are ‘managed to emphasise supply chain efficiency (lean supply chains), and those that emphasise supply chain responsive= ress and flexibility (agile supply chains). These two modes of ‘managing supply chains are reflected in an idea proposed by Professor Marshall Fisher of Wharton Business School? that supply chains serving different markets should be managed in different ways. Even companies that have seemingly similar products or services, in fact may compete in different ways with different products. For example, shoe manufacturers may produce classics that change little over the years, as well as fashion shoes that last only ‘one season. Chocolate manufacturers have stable lines that have been sold for 50 years, but also product ‘specials’ associated with an event or film release, the latter selling only for a matter of months, Hospitals have routine ‘standardised’ surgical procedures such as cataract removal, but also have to provide emergency post-trauma surgery. Demand for the former products will be relatively stable and predictable, but demand for the latter will be far more uncertain, Also, the profit margin commanded by the innovative product will probably be higher than that of the more functional product. However, the price (and theretore the margin) of the innovative product may drop rapidly once it has become unfashionable inthe market. The supply chain policies that are seen to be appropriate for functional products and innovative products are termed efficient (or lean) and responsive (or agile) supply chain polices, respectively. Eificient supply chain polices include keeping inventories low, espe- cially in the downstream parts of the network, so as to maintain fast throughput and reduce the amount of working capital tied up in the inventory. What inventory there is in the network is concentrated mainly in the manufacturing operation, where itcan keep utilisation high and therefore manufacturing costs low. Information must flow quickly up and down the chain from retail outlets back up to the manufacturer so that sched- epee ions rrvcpue ules can be given the maximum amount of time to adjust efficiently. The Supply chains with diferentend _ chan is then managed to make sure that products flow as quickly as pos- ‘objectives need managing differently. sible down the chain to replenish what few stocks are kept downstream, By contrast, responsive supply chain policy stresses high service levels and responsive supply to the end customer. The inventory in the network will be deployed as closely as possible to the customer. In this way, the chain can still supply even when dramatic changes ‘occur in customer demand. Fast throughput from the upstream parts of OPERATIONS PRINCIPLE the chain wil stil be needed to replenish downstream stocks. But those ‘Functional products requirelean downstream stocks are needed to ensure high levels of availabilty to end supply chain management; customers, Figure 7.5 illustrates how the different supply chain policies ‘innovative’ products require agile VE) aes teanagemet match the different market requirements implied by functional and inno- vative products,258 Chapter? = Supply chain management and multiple logistics service providers, and are often separate organisational entities, founded con a long-term basis or as a joint venture bebween a client and one or more partners. © 5PL?—you guessed it, almost inevitably, some firms are selling themselves as Fifth Party Logls- tics providers, mainly by defining thernselves as broadening the scope further to e-business. a ‘communication has had a significant impact on physical distribution management, wn gallant deshtemer st tonersteeirsotaew dsspion fist used at ID Center al the Massachusetts Institute of Technology (MIT), which created a set of standards for RFID. At its simplest, an loT isa network of physical objects (such as products, equpment, materials handing devices, trucks, et) that have electronics, software and sersrs connedtniy (oroudband internet, WF, Bketooth, ete), Combine ths wth global postionng systems (GPS) that permit instantaneous tracking of trucks, materials and people, and logistics ‘companies, warehouses, suppliers and customers can share knowledge of where goods are in the Back-loading means finding a potential customer who wants their goods transported from 8 to Ain the right timefra se in information availabilty.through the. internet, the cepa rece ‘Companies that can fill their vehicles on both the ‘outward and return journeys wil have lower costs per distance travelled than those “sre els et ecology that rack-and-tiace' technologies, for Customer development Earier inthe chapter, Figure 7.6 stated some ofthe gaps in perception and performance that can occur between customers ad suppliers. The purpose then wast deronsiate the nature of supplier development. The sae approach canbe used to analyse the nature of requirements and performance with customers. n this case, the imperative i to understand customer perceptions, both of ther requirements and thir view of your performance, and feed these into your own performance improvement plan, Whats ss common, butcan be equaly valuable, sto use these taps Ghown in Figue 7 7)t0 examine the question of whether customer requirements and prcep- torso performance ae ether accra or reasonable. For example, customers may place demands on suppers without fly considering tet consequences. It may be that sight modicatons in wwhatis demanded vould not inconvenience customers and yet woud provide significant benefits to suppliers that could then be pased onto custome. Slay, customers maybe incompetent ‘at measuring supple performance, in which case the benefits of excelent sup- ‘OPERATIONS PRINCIPLE plier service will not be recognised. So, just as customers have a responsibility Unsatisfactory customer relationships to help develop their own supplier's performance, in their own as well as their fan bcaused by reauremen ard ers interests, suppliers have a respansbity to develop thet customers Sr perertion pepe understanding of how supply should be managed EZ) the 80,000 kilometre journey of Wimbledon’ tennis balls ‘The Wimbledon ‘Grand Slam’ tennis tournament isa quintessentially British occasion, and Sl zenger, the UK sports equipment manufacturer, has been the official ball supplier for Wimbledon since 1902. Yet those balls used at Wimbledon, and the materials from which they are made,How isthe demand side managed? 259 Requirements perception gap ‘What you think your What your ‘stoner realy wants Supper peronnance think you performing Figure 7.7 Explore the potential perception mismatches to understand customer development needs will have travelled 81,385 kilometres between 11 countries and across four continents before they reach Centre Court. Dr. Mark Johnson, of Warwick Business School said: ‘itis one of the longest journeys | have seen for a product. On the face oft, traveling more than 80,000 kilo- metres to make a tennis ball does seem fairly ludicrous, but it just shows the global nature of production, and in the end, this will be the most cost-effective way of making tennis balls. Slazenger are locating production near the primary source of their materials in Bataan in the Philippines, where labour is also relatively low cost. ‘The complex supply chain isilustrated in Figure 7.8. t sees cay shipped from South Carolina in the USA, silica from Greece, magnesium carbonate from Japan, zinc oxide from Thalland, sulphur from South Korea and rubber from Malaysia to Bataan where the rubber is vlcanised —a chemical sere. = Sonne ra vc) ‘igen = Figure 7.8 Wimbledon’s tennis balls travel over £0,000 kilometres in thelr supply networkCritical commentary 262 with the inefficiency. By contrast, a chain whose operations had high levels of operations per- formance would be mote predictable and have faster throughput, both of which would help to ‘minimise supply chain fluctuations. Improve forecasts Improved forecast accuracy also helps to reduce the bullwhip effect. Bullwhip is caused by the ‘demand patter, lead times, forecasting mechanisms anc the replenishment decisions used to order product from production facilities or suppliers. Improving the accuracy of your forecasts directly reduces the inventory holding requirements that will achieve customer service level targets, Reducing lead times means that you need to forecast less far into the future and thus lead times have a large impact on bullwhip and inventory costs. The exact nature of how bull- whip propagates in a supply chaia is also dependent on the nature of the demand pattern, Negatively correlated demands require less inventory in the supply chain than positively corre- lated demand pattems, for example. But bullwhip is not unavoidable. By using sophisticated replenishment policies, designed using control engineering principles, many businesses have been able to eliminate bullwhip effects. Sometimes this comes at a cost. Extra inventory may be required in parts of the chain, or customer service levels reduce. But more often bullwhip avoid- ance creates a ‘win-win’ It reduces inventory requirements and improves customer service. Critical commentary This emphasis on understanding the end customer in a supply chain has led some author- ities to object to the very ter supply chain, Rather, they say, they should be referred to as demand chains, Their argument is based on the idea that the concept of ‘supply’ implies a ‘push’ mentality. Any emphasis on pushing goods through a supply ct Should be avoided. It implies that customers should consume what suppliers see fit to produce. On the other hand, referring to ‘demand chains’ puts proper emphasis on the importance of seeing customers as pulling demand through the chain, Nevertheless, ‘supply chain’ is stil the most commonly used term. @ The use of technology in supply chain management is not always universally wel- comed. Even e-procurement is seen by some as preventing closer partnership-type rela- tionships that, in the long run, may be more beneficial. Similarly, track-and-trace technology is seen by some as a vaste of time and money. ‘What we need,’ they argue, ‘isto know that we can trust the delivery to arrive on time, we do not need the capability to waste our time finding out where the delivery is." © The Interet of Things also opens up many ethical issues. People see its potential and its dangers in very different ways. Take the following statement:"? ‘Supermarket cards and other retail surveillance devices are merely the opening volley of the marketers! war against consumers. Hf consumers fail to oppose these practices rnow our long term prospects may look like something from a dystopian science fiction novel. ... though many ... proponents appear focused on inventory and supply chain efficiency, others are developing financial and consumer applications that, ifadopted, | will have chilling effects on consumers’ ability to escape the oppressive surveillance of“~ 264. Chapter? » Supply chain management ‘manufacturers, retailers, and marketers. OF course, government and law enforcement will be quick to use the technology to keep tabs on citizens as well.’ © Possibly the loT issue to make the most headlines is that of its potential for being hacked to launch security attacks. As some point out, connecting things to each other through the internet will always expose new vulnerabilities. Looked at one way, we no longer have things with computers embedded in them. We have computers with things altached to them. Security is, arguably, given too litle emphasis in the use of loT in sup ply chain operations. "4